Intermediate macroeconomics chapt03

Constant Returns to ScaleWhen an increase in the quantity of the inputs resultsin an equal increase in the quantity of the output

F(zK, zL) = zYwhere z > 0

Supply of ProductsBecause we assume that the supplies of capital andlabor inputs and the production technology are fixed,the supply of product output is also fixedY = F(K, L) = Y

Input Price DeterminationInput or factor prices are determined by the supplyand demand for them.Because we assume the input supply is fixed, itssupply line is vertical. The factor demand curve isdownward sloping.The intersection of demand and supply determines thefactor price.

Diminishing Marginal Product of LaborAs more labor input is added, holding capital input constant, thequantity of output will increase at a decreasing rate. Hence, MPLdeclines, due to inefficiency, as more labor is added.Units of output

Diminishing Marginal Product of CapitalAs more capital input is added, holding labor input constant, theoutput will increase at a decreasing rate. Hence, MPK declines,due to inefficiency, as more capital is added.Units of output